Understanding clearing in payments

Clearing is the post-transaction process of exchanging transaction data and reconciling funds between parties involved in a card payment.

In the intricate space of payments, the term “clearing” plays a pivotal role in making sure that financial transactions are performed seamlessly and securely among parties involved. This process is integral in the transaction cycle, as it is responsible for transmitting the credit/debit card information across parties, while enabling the verification of transaction data to mitigate the risk of chargebacks or fraud and facilitating the settlement of funds to the merchant's bank account.

In this article, we dig deeper into the concept of clearing. We also explore how clearing works, its distinction from payment settlements, and the benefits it can offer to merchants and various players participating in card transactions.

What is clearing and why is it important?

In the context of financial payments, clearing describes the post-transaction process of exchanging payment information and reconciling funds between the parties involved in a card transaction. In fact, to facilitate the transfer of payment data during transaction processing, card schemes carry out “clearing” of each card transaction every processing day. This interaction is interbank, as it takes place between the merchant’s acquiring bank (or else, acquirer) and the customer’s issuing bank (or issuer for short) via the card schemes.

It should also be noted that the term clearing refers to the procedures related to the processing of card-based payment transactions (be it online or in-store) in accordance with the regulations of each card scheme.

Essentially, clearing is the intermediary between the initiation of the transaction by the consumer and the final payment settlement (more of this below). The transaction details exchanged during the clearing stage are crucial for issuers in matching their authorisation records to the clearing data – with authorisation being the first step of payment processing when the cardholder’s transaction details are verified, and other checks are conducted by the issuer – and appropriately debiting cardholder accounts. Clearing is equally significant for acquirers in making credits and settling the funds to merchant’s bank accounts.

How clearing works

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Clearing vs settlement – what’s the difference

The main difference between settlement and clearing is that the latter occurs before the settlement and includes the exchange, validation, and reconciliation of transaction information across the payment network. It encompasses the matching of transactional data and assessing risk, among others. On the other hand, settlement is the actual transfer of funds between the customer and the merchant's bank account through the consumer’s issuer and merchant’s acquirer, respectively, in order to finalise the card payment.

The main difference between settlement and clearing is that the latter occurs before the settlement and includes the exchange, validation, and reconciliation of transaction information across the payment network. It encompasses the matching of transactional data and assessing risk, among others. On the other hand, settlement is the actual transfer of funds between the customer and the merchant's bank account through the consumer’s issuer and merchant’s acquirer, respectively, in order to finalise the card payment.